Winter 2015

FORGIVE AND FORGET, WHY AMERICA SEEMS TO HAVE SELECTIVE MEMORY

If you ask most people in the United States, they will remember the recession that began late 2007, characterized by the sub prime mortgage crisis (The National Bureau of Economic Research). However, often people do not actually know what any of that means, or why it happened, and what steps need to be taken to prevent it from happening again. I think it is due our animalistic nature, and ability to recognize patterns. Sometimes, creating patterns that are not really even there. If things are getting better then why won’t they continue to behave in that way? Prior to the crash, people saw rising home prices and figured that would continue forever, however, not realizing that some demand soar was due to banks risky lending patterns to people with low credit. Although people should not have lived outside of their means (buying homes merely because they thought its value would increase), I believe it is more the responsibility of the lending institution to use their resources available to them to recognize the high risk associated with lending to certain people. Now nearly seven years later, the general public of America appears to be following down the same path. After the main cause of the recession was revealed to the general public through media outlets, and regulatory agencies there was a general distaste for “banking” and “bankers.” Especially the ones viewed as profiting off the loss of others. Many people viewed them as untrustworthy, but time has passed and it seems that all is forgiven or at least forgotten.

“Mortgage applications soared in the first full week of the year as consumers raced to lock in mortgage rates that have hit their lowest level in almost 20 months” (Light, 2015).

This rise in mortgage applications is not necessarily a bad thing, as a majority of these people were refinancing to get a lower rate (Light, 2015). But, it is likely that some people are starting to notice a pattern and not wanting to miss out on an opportunity figure they should join in. Seeing the housing market as once again the way to gain wealth and to maintain it. This is not always the case. It seems that many people view financial decisions and opportunities as a get rich quick scheme, yet nearly anyone with experience will tell you to make infrequent smart calculated investments rather than chasing the bubble hoping it does not burst.

“Also, many people think they are being fully rational when they are depending very heavily on returns in the future having similar properties to returns in the past, and depending on those returns to have few sudden jumps” (Kimball, 2012).

In accounting and finance, it is said time and again that whenever you are looking over a company’s financial statements that past performance is not necessarily an indicator of future success. Just because something was increasing in the past doesn’t mean it will increase in the future, especially not at an increased rate. If this were the case there would be little risk with investing

Yet, from talking to most people around me, and based on the two quotations from above, people see the price of a something (say a stock) going up and they assume it will continue that way, even if they are explicitly told that is not the case. They are not focused on the how or the why, just the bottom line increase in the value of something. They do not seem to care that a company merged with another to reduce payroll and other administrative expenses increasing net income. They just want to see the words “increase.” Maybe they just aren’t a “finance person.” This attitude is eerily similar to the attitude prior to the mortgage crisis; things are going up so people just assume they will stay that way, never worrying about the how or why. Let’s not forget what happened just a few years ago.